By Laurence Norman
BRUSSELS -- The European Union set out a $2 trillion coronavirus
response plan, including a massive pooling of national financial
resources that, if approved, would deepen the bloc's economic union
in a way that even the eurozone debt crisis failed to achieve.
Wednesday's proposal, composed of a EUR750 billion ($824
billion) recovery plan and EUR1.1 trillion budget over the next
seven years, aims to lift the region from its economic slump, but
must overcome infighting dividing the bloc.
If backed by all 27 member states, the plan would represent a
historic step in knitting together national finances across the
bloc. The proposal from the European Commission, the EU's executive
arm, follows a similar Franco-German plan set out last week and
would establish significant new transfers of wealth among members,
funded by commonly issued debt.
"This is Europe's moment," said European Commission President
Ursula von der Leyen. "Our willingness to act must live up to the
challenges we are all facing."
German Finance Minister Olaf Scholz recently compared the
proposed assumption of debts across EU borders to Alexander
Hamilton's move in 1790 for the new U.S. government to assume
states' debts from the Revolutionary War. But unlike the U.S. under
the Constitution, the EU remains a club of sovereign states, many
of which oppose sharing financial burdens. As the crisis fades and
political winds shift, even Europe's more supportive countries
could turn against the idea.
The EU aims to provide a massive fiscal injection for the bloc's
hardest-hit countries without increasing the already soaring debt
levels of southern nations including Italy, Spain and Greece. That
would allow those governments to spend more now in response to the
pandemic crisis.
Already, a group of wealthier northern countries, including the
Netherlands, Denmark, Austria and Sweden, have questioned the plan.
Dubbed the "frugal four," they want to avoid the political risk of
putting their taxpayers on the hook to repay EU debt issued to fund
major spending elsewhere.
"Negotiations will take time," said a Dutch diplomat. "It's
difficult to imagine this proposal will be the end-state of those
negotiations."
Europe's poorer countries are disadvantaged versus their
northern neighbors in how much they can subsidize companies,
support workers and stimulate their economies. Germany and other
countries that were financially strong before the pandemic have
pumped trillions of dollars into their economies and moved quickly
to resume business activity.
In the U.S., President Trump has signed four bills to combat the
economic hit from the pandemic, including helping large and small
businesses and those left unemployed. The unprecedented string of
bills totaling nearly $3 trillion was driven by consensus among
party leaders who tamped down dissent within their caucuses.
Japan's Prime Minister Shinzo Abe said the total size of its
stimulus packages, including some financing aid that doesn't
require direct government spending, topped $2 trillion, equal to
about 40% of Japan's $5 trillion economy.
The U.K., which recently left the EU, has launched measures
including a jobs-support plan costing GBP123 billion ($152
billion), or 5.9% of annual economic output.
Hard-hit EU countries, in contrast, rely heavily on tourism that
has been crushed and is unlikely to recover soon. The pain in those
countries, all of which use the euro, has prompted northern
eurozone countries including Germany and France to act more
aggressively than they did during the financial crisis.
The plan's most controversial element, the EU's issuance of
debt, would be repaid over several decades, starting only in 2028,
through a combination of bloc-wide taxes and increased member-state
contributions to future multiyear budgets. Some extra money would
start flowing this year to stop companies collapsing and keep
public investment flowing.
The EU has already approved a EUR540 billion emergency response
package including money for unemployment schemes, a loan facility
for firms and precautionary credit lines from the region's bailout
fund.
All EU countries must approve the recovery plan, which includes
EUR500 billion in grants and EUR250 in loans to hard-hit members.
While many compromises will be needed, the biggest fights are
likely to arise over the split between grants and loans, what
strings are attached, and how to win over the EU's newer, poorer
members in its east.
The plan, if approved, would respond to demands from the
European Central Bank for the region's governments to match its
ultra-easy monetary policy with coordinated, large-scale fiscal
efforts. German Chancellor Angela Merkel's backing for a massive
recovery plan followed a recent decision by the country's
constitutional court raising doubts over the legality of ECB
bond-buying programs. Those programs underpinned the EU's recovery
from the financial crisis almost a decade ago.
EU officials are braced for weeks of arguments. They hope that
national leaders will be able to meet in person in June to find a
compromise, though many say further talks may be needed and that an
agreement before summer isn't guaranteed.
Raising debt isn't new for the EU, which raised tens of billions
of euros during the financial crisis to fund a eurozone bailout
fund. But the scale would be far greater and break a taboo
forbidding the EU's executive body from taking on large amounts of
debt.
While officials in Berlin, Paris and Brussels say this would be
a one-off action, prompted by the massive economic shock of the
coronavirus, the proposal could help address a structural problem
that has dogged the EU and its 19-country eurozone -- the two-tier
split between wealthy countries and cash-strapped ones.
In a bid to win their support for the plan, the Commission's
proposal included significant new cash for eastern member states --
which haven't been gravely affected by the health crisis. These
countries have previously been major beneficiaries of the bloc's
largess. But amid strains over migration and rule-of-law issues
between Brussels and members including Hungary and Poland, some
diplomats said there will likely be an effort to squeeze the
proposed cash for East European countries in a final, less
ambitious version of the plans.
Write to Laurence Norman at laurence.norman@wsj.com
(END) Dow Jones Newswires
May 27, 2020 12:06 ET (16:06 GMT)
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